It is desirable that the process of buying and selling initial offerings and large regulated blocks of commodities or securities (hereinafter “securities”) be made more accessible to more investors, be made more price transparent by providing more visibility into the bid and offer process, reduce the costs to issuers and investors and increase the amount of trading in these securities.
The present system of offering new issues of securities is non-transparent, inefficient and biased toward certain buyers and broker-dealers. As used herein, “securities” include equity securities, commodities (as traded on a licensed commodity exchange), fixed income or debt securities including, for example and without limitation, corporate bonds, municipal bonds, mortgage backed bonds, emerging market bonds, junk bonds, treasury bonds, convertible bonds, gold, and the like. These will be generally referred to as “securities.”
While the following describes the technical problem in terms of debt securities, the general issues relate to the sale of regulated securities, commodities and other similar assets. Those skilled in these arts will recognize that the technical problem described specifically is a general one which may be solved within the letter and spirit of the invention disclosed herein.
It is typical for a municipality, corporation, or other non-U.S. treasury issuer to sell its securities by having an investment bank, or other broker, underwrite an offering. Typically, corporate bond syndications use an investment bank's salesmen to convey the terms of a pending offering to potential investors along with some preliminary, unofficial “price talk.” In this way, a dialogue is initiated with investors that is intended to garner feedback concerning pricing and investor interest. This feedback is shared with the issuer and other investors.
This process is generally referred to as “book building.” Book building is iterative and filtered: a sort of oral history of the “book,” listing interested investors and the quantity of securities in which they are ostensibly interested, is told, retold and modified until the offering or “deal” is as big and as cheap as the issuer will tolerate. The deal is then priced by the syndicate and the issuer enters into a written agreement with the underwriter to make the offering. Thus, generally, no written commitment to actually make the offering is made by the issuer until after the offering is priced and subscribed. After the initial issue has been through this initial sale process, the securities are freed to trade in the “secondary” market, that is, the market in which securities other than new issues are traded. The issuer of the securities will typically pay fees to the underwriter for its marketing, pricing and allocation services.
In this initial sale system, market size and market price are controlled by the syndicate. And, as discussed below, the syndicate may wish to massage market size and price in order to accomplish a set of objectives which may belong to the underwriter or some subset of participants rather than the issuer and the market at large. Certain investors may be favored by an underwriter, such that other investors who express an interest in purchasing such bonds in an initial offering will have no certainty that they will be allocated any bonds by the syndicate desk. Additionally, a deal will typically become several times oversubscribed, that is, more securities will be desired by investors than are being offered by the issuer.
Potential investors are typically aware of this and, so, will indicate a quantity of securities to the syndicate which may be many times the actual amount of securities desired by the investor. Because investors understand that, in this traditional book building process, information can be filtered and massaged by the underwriter to achieve objectives that may differ from their own, investors tend to view this process with suspicion and caution. Thus, investors may attempt to manipulate the system in their favor in a number of ways. For example, as noted above, potential investors may pad their orders, indicating interest in a greater volume of securities than they truly desire. Potential investors may also stipulate that an order will fall away if the price is increased when, in fact, this simply represents posturing. The deal is then managed to the “proper” price and size by the syndicate, often to maximize fees and to please one constituent or another, but rarely to please the market as a whole or to achieve the most efficient price and distribution profile.
Because of all this attempted manipulation, the underwriter may not be able to get a good understanding of the true intentions of the potential buyers of the securities at the various potential price points. Behavior of all parties is governed by an objective to manipulate the system by using the filtering process to get the upper hand. Thus, it can be the case that, once the real market price is established in secondary trading, one constituency gains at the expense of another, leading to further mistrust of the system.
Recent conditions in the marketplace for debt securities amplify the need for a change in how these securities are bought and sold. For example, technology has become easily available to conduct electronic sales (by auctions, etc.) that promotes unfiltered price discovery on a low-cost, real-time basis. Secondly, debt investors and issuers have become financially more sophisticated in their knowledge of markets, their ability to analyze credit quality and their ability to recognize value in the market. This means that they are less dependent on financial intermediaries for research and advice than they were in the past. Third, the amount of investable funds in the market has grown dramatically over the past decade, creating intense competition for new debt issues within the investor community and creating a need for a better market clearing process. Fourth, the services provided by traditional investment banks related to the new debt issue they originate have declined significantly, while the fees charged for services rendered have remained constant. The most significant example of reduced service is the sharp decline in secondary market liquidity provided by the traditional investment banks, largely the result of a decreased appetite for the risk amidst decreased profitability in secondary corporate bond trading. Finally, the current system encourages misrepresentations about the size and quality of the book, encourages special interest deals and often creates major disputes regarding allocations which create a mistrust of the system, thereby causing investors and issuers to inflate values and amounts in a way which exacerbates the hidden nature and inaccuracies of prices in the system.
With the advent of the Internet and reasonably secure telecommunications systems, various attempts are being made to use these systems for the management of investment portfolios for mutual funds and others and for systems covering the sale and purchase of treasury bonds, corporate bonds and other securities in a way which avoids many of the described problems. Specifically in the area of bonds and other equities, for example, we have seen various patented systems. One such attempt at portfolio management is described in the well publicized U.S. Pat. No. 5,193,056 issued to Signature Financial Group on Mar. 9, 1993 titled “Data processing System for Hub and Spoke Financial Services Configuration.” More specifically an attempt at automating the trading of debt securities in the secondary market is described in U.S. Pat. No. 5,809,483 issued Sep. 15, 1998 to S. William Broka et al, titled “Online Transaction processing System for Bond Trading.” Another system is described in U.S. Pat. No. 5,946,667 issued Aug. 31, 1999 to Morgan Stanley Group titled “Data Processing System and Method for Financial Debt Instruments.” This system is a system for investors to track the performance of certain issued debt instruments within a limited period of time and especially for implementing investor participation in domestic and foreign capital markets through positions in indexed vehicles which are packaged as debt instruments. Still another more recent example of the use of the Internet to enhance general trading is found in U.S. Pat. No. 6,023,686 issued Feb. 8, 2000 to Health Hero Network, titled “Method for Conducting an on-line Bidding Session with Bid Pooling.” This system, while not aimed specifically at any specific security market, is a system for allowing individuals to pool their bids as a group in order to qualify to bid on a property in an on-line auction. That is, it allows individuals with limited funds to pool their resources with other individuals of limited resources to be able to qualify (i.e. have enough capital) to buy a piece of property that has been auctioned.
Other known internet related systems for buying and selling securities and commodities include a system set up in 1992 by Intervest, aimed at facilitating the secondary market sales of bonds between investors and broker-dealers. More recently, Brokertec, a consortium set up by Goldman Sachs and six other large institutions in the summer of 1999 is said to be trying to create an electronic inter-dealer broker for cash and futures. Tradeweb, an electronic brokerage system for U.S. Treasuries, was set up by four investment banks (CSFB (Credit Suisse First Boston), Goldman Sachs, Lehman Brothers and Soloman Brothers) in 1997 and has apparently been successful in trading these securities. These Government bonds however do not have the problems mentioned above in that they are heavily traded, their price is well known in advance and are deemed the ultimate safe investment. Still another on-line system for handling bond trading, primarily in the secondary market, is BondDesk.com owned by BondDesk.Com LLP, an internet-based provider of retail fixed income trading software, and owned by BondExchange LLC, Goldman Sachs Group Inc., Paine Webber Inc., and Spear, Leeds & Kellog. Almost all of these systems which strive to offer new issues follow the same logic; that is, they distribute research, prospectuses, filings and other new issue information over the web, which cuts down on paper, faxes and some phone calls. However the ultimate pricing and allocation of securities is still conducted via traditional methods.
There is still a need for an Internet-based centralized system which provides a low-cost, open and decentralized price discovery environment. That is, a system using current technology to improve the transparency of the price discovery process, eliminate mistrust, reduce the special interest money involved, and bring the cost of distribution more directly in line with the value added by the medium. The present invention provides a system to accomplish these goals and is applicable to the general securities and commodities transactions.